Baosteel has announced its October ex-works domestic steel list pricing with HRC product prices to increase by ~7% (US$45/t). While an increase of this magnitude was widely anticipated, we think it is an incremental positive for BSL given Baosteel had kept September pricing flat when an increase was expected by the market.
The Baosteel October price rise and recent domestic spot HRC price increases are the result of supply side constraints in China driven by government measures to restrict production in order to meet energy efficiency targets. As noted last week, the Chinese government cut power to steel mills in Wu’an city (steel making capacity >20mtpa) in an effort to assist its end CY10 target of reducing energy consumption per unit of GDPby 20% (the 11th five year plan).
With only four months remaining in the five year period, energy savings are at 15.6% versus the 20% target. We expect that power cuts targeted at high energy consumption industries (especially steel) will be rolled out to other regions and thus we see the case for further price increases before year end.
As the steel price increases will be largely a result of supply reduction we struggle to see the case for spot iron ore prices to increase from current levels before year end. Chinese spot iron ore is currently at US$139/t cfr, off 6% from US$148/t cfr seen one month ago.
Source: Reuters
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